I had the opportunity to share some opinions on the impact of intellectual property (IP) theft, some already posted to this list, with a large, global supplier of parts and subsystems that was known for its production and quality focus but it had not been clear to me that the supplier was also ahead of many of its peers in its understanding of the diversion risk that it and its subsuppliers faced in certain regions.

[The] OEMs (Original Equipment Manufacturers at the top of their respective supply chains) have been virtually ordering their suppliers explicitly or implicitly to China (a) to produce lower cost products for resale back to the OEM or one of the subsuppliers in the chain, or (b) support OEM plants in-country. The demand for cost reduction is the pole star. Our prediction is that the OEMs, whose hubris leads them to mistakenly feel themselves above the risk horizon, will not protect their suppliers as new Chinese or other low-cost country providers come on line and will shift purchases to those new firms, hollowing out their own industrial infrastructure, even as OEMs press those same suppliers for cost reductions on a year-to-year basis.

To this, I added that since the OEMs had financial pressures of their own and would not relent in their demands for immediate direct cost reduction such that the supplier had no opportunity to not go to the desired low cost area, that it was up to the supplier to address the incursions against the intellectual property of their firm and the subsuppliers in any critical path of their supply chain. Returning to "Hemorrhaging," I noted that:

"All technology leaks over time. The trick is to degrade and delay that leak. A major component of that [effort] is to put in place a process that, in simple terms, drives the bad guys down the street to a less well protected firm."

This commenced a discussion in which the supplier noted that it had never demanded such proof of ability from its subsuppliers that they could protect their intellectual property or any shared by this top tier supplier. I noted that was likely so as none of the open source descriptions of their strategic supplier selection process had any mention of IP theft mitigation. I then noted that their supplier selection process did have a vast amount of selection criteria pertaining to quality and that the supplier regularly made detailed examinations of a potential subsupplier's ability to produce quality parts prior to awarding a contract and that it made periodic evaluations of that supplier's ability to sustain its quality.

I offered the prediction that just as quality has become a mandatory requirement in order to bid, i.e., that it had become part of the baseline needs, that successful, surviving firms will make IP theft a part of that same baseline. Furthermore, IP theft mitigation will follow a similar adoption trajectory to that of quality -- and it can be presented to management on that basis in order to ease implementation. Some suppliers will see the need clearly -- or will be selected by their ability to see the need -- and become early adopters that maintain the first mover advantage provided by their R&D while others will fall behind, will be picked off in terms of differentiating technology, and will exit the market.

Suppliers must absorb yet another criteria in order to remain globally competitive. As Dr. Edwards Deming would say at the beginning of every quality seminar, as Clare Crawford-Mason and Linda Doherty recall, "It is not necessary to change. Survival is optional."

Once intellectual property theft mitigation enters the supply chain critical path, it will have an effect equal to quality or better yet, commonality of parts, in restructuring that top tier supplier's supply chain design. (The effect can take time however. We frequently see suppliers attempt to rationalize their supply chains without first performing a parts commonality review.)

Not covered in the discussion was the supplier's construction of advanced R&D facilities in IP risk areas such as China. I maintain that such R&D facilities are no different from Venture Capitalists moving their assets to low (direct) cost but high (total) risk areas. Returning again to "Hemorrhaging":

"Venture Capital (VC) investors are driving their stable of firms to create product and produce revenue. Risk assessment is very low on their horizon. Private conversations reveal that VCs preach the mantra "to their portfolio companies to outsource hardware development and manufacturing to China or become uncompetitive." Some VCs have already made the next step of forming development groups in the PRC precisely to serve their entire stable of firms. Now the VCs have put a superb target-rich environment under one roof. Unlike established industrial firms that already have revenue streams, VCs have little of value in their stable of firms save their intellectual capital."

That must wait for another day. Just remember: Change is not necessary. Survival is not mandatory.